Bullying in Berlin

Editor?s note: This is the second in a two-part series. (Part one can be read here.)

BERLIN ? In two days of closed-door meetings recently, an international bureaucracy of industrialized nations?whose membership is dominated by ?old Europe??was attempting to ?persuade? low-tax nations to raise taxes and eviscerate financial privacy.

The Paris-based Organization for Economic Cooperation and Development (OECD), which receives some $50 million annually from U.S. taxpayers, has for six years pushed for eliminating what it calls ?harmful tax competition??which can be best described as any policy that undermines the ability of welfare states like France, Belgium, and Germany to maintain extraordinarily high tax rates.

The stated goal of this project is to stamp out so-called ?tax havens??jurisdictions that have appealing tax and privacy laws, and thus attract investment capital and business from high-tax regions, primarily European welfare states. The OECD even has a blacklist, and has threatened these jurisdictions with financial protectionism.

The problem, at least from the OECD perspective, is that the jurisdictions they are targeting insist that they shouldn?t be forced to surrender their fiscal sovereignty until all nations and territories agree to the same policy.

This ?level playing field? requirement puts the Paris-based bureaucracy in a quandary since member countries such as Switzerland, Luxembourg, and even the United States, are tax havens under the OECD?s standards. Each has little to no taxes on non-resident investors, and those foreign investors generally can structure their affairs to avoid the reporting of their financial information to home country tax authorities.

Yet the OECD has been unsuccessful to date in ?persuading? its own tax haven members to adopt bad tax policy, in part because it is much more polite when dealing with its own member nations. There are no threats of protectionism and no blacklist. The bureaucrats apparently realize the futility in fighting nations that can fight back.

So it is little wonder that smaller nations like Panama and the Bahamas felt unduly picked upon when their supposed sin is adopting rules for foreign investment modeled on those of several OECD members.

Along with the Friedrich Naumann Foundation, the groups sponsored a forum on Wednesday, June 2, on the eve of the OECD conference, where two different panels spelled out precisely why the OECD?s claims that a ?level playing field? exists were, at best, intellectually dishonest. To the extent any attendees needed a reminder that lower taxes are fundamentally sound economic policy, there was even a Swiss professor on hand to give a powerpoint-based lecture.

Representatives from several low-tax countries on the OECD?s hit list attended the free market event and told this journalist afterward that they had heard more than enough to convince them that the OECD was not playing fair. And over the next two days, they stood their ground.

It appears that the OECD conference was doomed from the start. Small countries not privileged enough to be included in the OECD were determined not to cave, particularly since OECD members like Switzerland probably never will. The affair, ironically, was not terribly contentious, as low-tax nations politely smiled and nodded, but in the end, brushed off the tax cartel?s entreaties.

The OECD essentially admitted defeat, pushing back the date of the next meeting until sometime in autumn 2005.

Failing to twist the arms of tiny jurisdictions like the Cayman Islands and Anguilla, the OECD?s next mission is an odd mix of quixotic and absurd. The tax cartel?s black list is now being expanded to include various Asian nations, particularly Singapore and two jurisdictions that are part of communist China, Hong Kong and Macao.

Which raises an important question: why is the U.S. supplying one-fourth of the $200 million annual budget of a group that thinks jurisdictions within a communist country have dangerously low tax rates? And on a practical level, does anyone at the OECD really think that China cares what a bunch of bureaucrats in Paris think they should do with their tax policy?

OECD officials must be drinking a little too much of the free vintage wine that they keep in the cellar of their Paris office. (Seriously, free wine?or at least, free to them.)

Although U.S. representatives at the OECD conference were relatively quiet over the two days, there is little indication that the U.S. will pull the plug on the increasingly large appetite of the OECD for higher global taxes.

Plunking down $50 million a year should buy a lot of influence, yet for some reason, the White House has stayed largely passive, allowing Treasury Department officials to give the OECD more or less free rein to push tax policy that is clearly antithetical to President Bush?s well-stated beliefs.

And if a fierce tax cutting Bush administration can?t thwart the OECD?s expanding mission, then what might happen under a President Kerry or (heaven forbid) a President Clinton?

The OECD would like nothing more than for the U.S. to end its status as the world?s largest ?tax haven??there is roughly $5 trillion in passive foreign investment sitting inside the United States, capital that generally can avoid being taxed by any government.

If the U.S. acceded to OECD wishes and began taxing the $5 trillion or reporting the income from those investments to foreign governments?meaning their tax collectors could get their hands on that money?then the loss to the U.S. economy in lost investments could be much greater than the $50 million taxpayers are now forced to shell out each year to support the OECD?s push for higher global taxes.